Thursday, January 14, 2010

A Balancing Act

Yesterday afternoon, we had our second Financial Accounting class. I thought it went well. Guiding an introductory level course is a balancing act at the very beginning of the semester as you try to accomplish basic goals: creating a foundation of knowledge that can be built on throughout the semester while also helping students to understand why the material is both beneficial and interesting.

No one wants lost students so you have to make sure that they start to learn the basics sooner rather than later. However, no one wants bored and uninterested students either so you must provide a rationale for doing the necessary work. That can be a real balancing act. I am always intrigued to read the first few pages of a Financial Accounting textbook. Some seem to push students so fast that they must surely get lost, confused, and frustrated while others go so slowly that you wonder if anything is actually learned and whether the students are able to stay awake.

Yesterday, I started off by asking the following question: “if we had a time machine so that we could go forward in time and then come back to the present, what would you really want to know about a company, such as Apple, a few years from now?” I typically start off by getting a few obvious answers: is the company still in business, has the company been profitable, are they getting bigger? My response: “those are good answers but is that ultimately what you would want to know if you had the miracle of a time machine?”

In the first class on Monday, we talked about making a profit in investing through stock price appreciation and dividends. Not surprisingly, after a few minutes yesterday, a student suggested that she would want to know the stock price in the future and the amount of dividends paid (and cash flows if she were a creditor). I then asked her the following question which was one of my major points for the day: “Assume that we go into the future and learn the stock price for Apple, the amount of dividend payments, and its cash flows. We then come back here to the present. When we get back to the present, I hand you all of Apple’s current financial information. What would you do next?”

“Throw it in the trashcan,” was her astute answer. Perfect; we are making progress.

Regardless of all the explanations found in a textbook, for an investor or a creditor, the ultimate purpose of financial information is to help predict stock prices, cash dividends, and cash flows. Everything else is just a means to those ends. Students easily understand that goal and it is one that they find intriguing. They can see why that might benefit them regardless of their future careers. Accounting IS relevant to them. That goal is not vague and theoretical. It is real and understandable and promises some potential benefit to their own lives.

Then, I switched to talking about accounting as a language. I constantly talk about conveying information so we chatted about how a language conveys information. “How does a language allow me to communicate both simple and complex information to someone who is five feet away or 5,000 miles away?” Again, that is not a difficult question—even on the second day of class. Each language has a relatively set terminology. Most people have roughly the same understanding of words such as “apple” and “cat,” for example. And, there is a structure to the language created by punctuation, syntax, and other grammatical rules. If both parties know the terminology and understand the structural rules, communication is possible.

I ended the day with one basic question: what is the purpose of this course? It didn’t take long for the group to come back to this answer which is how we ended the class: “to learn the structural rules of financial accounting and its terminology so that we can understand the information prepared by an organization, knowledge which can enable us to make reasonable predictions about future stock prices, cash dividends, and cash flows.”

Okay, there is still a long way to go this semesterbut I think, for the second day of class, we have started the learning process and given them a reason to do the work necessary. Tomorrow, we will start to introduce some of those structural rules and the terminology that will enable us to make those predictions. Hopefully, the students will understand why that knowledge can prove helpful to them.